In the recent past, the world has witnessed an influx of technological advancement particularly in the financial sector leading to the development of new forms of money including the Central Bank Digital Currency ("CBDC").
A CBDC is an electronic record or digital token of a country's official currency. It is issued and regulated by the nation's monetary authority or central bank.2 Most digital payments are essentially checks – instructions for a bank to pay "real" money from a depositor's account. As such, multiple actors are involved to enact the transactions, clearing payments and administering millions of individual accounts. A CBDC on the other hand, has evolved from decentralized digital currencies like bitcoin and Ethereum and is more like cash itself, and in cutting out the middle-men it seemingly travels directly from person to person or from customer to vendor like a coin.3 It is therefore necessary to emphasize that the CBDC is not a cryptocurrency. While CBDCs use permissioned (private) blockchains, cryptocurrencies use permissionless (public) blockchains, this means that the CBDC is a centralized structure and the Cryptocurrency is not; Cryptocurrency users enjoy anonymity and CBDC users will have their identity tied up to an existing bank account and an equal amount of personal information; On CBDC networks, a central bank decides the rules while on crypto networks, the authority is delegated to the user base, which makes decisions by reaching a consensus; CBDCs can only be used for payments and other monetary transactions while Cryptocurrencies can be used for speculative purposes and for payments as well.4
In a survey carried out by the Bank for International Settlement ("BIS") about 80% of 66 Central Banks indicated interest in CBDC while 10% are imminently close to launching a CBDC for the general public.5 This shows the growing popularity of CBDC globally.
Introduction of CBDC in Nigeria
Ever since 2019, when Libra,6 a digital currency backed by Facebook was unveiled, there has been a deliberate effort by several governments around the world to explore the option of digital currency which has now come to be known as the CBDC.
Sometime in April 2017, the Federal Government of Nigeria launched a plan for economic growth and as part of its plans for growth, developing a local digital currency was considered. The government had since nursed and researched extensively on digital currencies. After much anticipation, the director of information technology for the Central Bank of Nigeria ("CBN"), Rakiya Mohammed announced that the CBN will launch a CBDC project christened "PROJECT GIANT".7 She further stated that the project will run on the hyper-ledger fabric blockchain, an open-source project for building blockchain-based products, solutions, and applications used by private enterprises and is estimated to kick off on October 1, 2021.8
On Monday 30th of August 2021, the governor of the Central Bank of Nigeria ("CBN"), Mr. Godwin Emefiele, announced the formal engagement of the global Fintech company, Bitt Inc., as the technical partner for its digital currency project. The Bitt. Inc., is a Barbados-based fintech firm that played a huge role in the development of the Eastern Caribbean Central Bank, DCash launched in April 2021 and was selected based on its technological competence, efficiency, platform security, interoperability and implementation experience. 9 The partnership is geared towards the launching and unveiling of the eNaira, the proposed currency.
According to Mr. Emefiele, the CBDC is expected to provide a number of benefits which include increased cross-border trade, accelerated financial inclusion, cheaper and faster remittance inflows, easier targeted social interventions, as well as improvements in monetary policy effectiveness, payment systems efficiency, and tax collection. 10
eNaira: Central Bank of Nigeria's Digital Currency
The Currency notes and coins issued by the Bank shall be:
- in such denominations of the Naira or fractions thereof as shall be approved by the President on the recommendation of the Board; and
- of such forms and designs and bear such devices as shall be approved by the President on the recommendation of the Board.11
eNaira is a Central Bank of Nigeria-issued digital currency12 that provides a unique form of money denominated in Naira. eNaira serves as both a medium of exchange and a store of value, offering better payment prospects in retail transactions when compared to cash payments. eNaira has an exclusive operational structure that is both remarkable and nothing like other forms of central bank money.13 Core features of the eNaira include: a Unified Payment System; Contactless Payment; Bank Account Management; Peer-to-Peer payment; etc. 14
The eNaira will be provided by the CBN to intermediaries (i.e., financial institutions) who would in turn help supply to individuals/customers. These institutions would maintain a treasury wallet to collect eNaira from the CBN. They would thereafter oversee ID verification, eNaira payment processing, and generation of wallets for Nigerians to store their eNaira. Through the app, customers would be able to identify a bank of their choice, connect to their bank accounts and carry out transactions.15
Additional benefits of the eNaira include: fostering economic growth by offering easier access to capital and financial services thereby increasing economic activities at low/no interest transaction rate; providing a secure and cheaper diaspora remittance option and an increase in the speed of concluding such transactions; limiting the use of digital currencies for illicit or fraudulent purposes because of its traceability; enabling effective, equitable, and faster distribution of cash assistance to households and communities included in government Social Welfare Programs; providing financial inclusion by making financial services available to people or communities who do not have (enough) banking opportunity; increasing local and international trade by making transactions cheap, safe, quick, and better; ensuring stronger security because it cannot be forged or counterfeited as a result of its unique identity and security structure; aiding revenue collection by reducing cash handling costs.16
A major disadvantage of the eNaira is Privacy. Users would have to give up some degree of privacy since the administrator is responsible for collecting and disseminating digital identifications. The provider would become privy to every transaction conducted. This can lead to privacy issues, similar to the ones that plague tech behemoths and internet service providers (ISPs). For example, criminals could hack into and misuse information, or central banks could disallow transactions between citizens.17 Other disadvantages are the legal and regulatory issues pertaining to CBDCs, which creates a 'black hole'. What will be the role of these currencies and who will regulate them? Considering their benefits in cross-border transfers, should they be regulated across borders? Experiments in CBDCs are ongoing, and this could translate to a long-time frame.18 Also, it could substitute a weaker country's currency; the portability of these systems means that a strong CBDC issued by a foreign country could end up substituting a weaker country's currency. A digital U.S. dollar could substitute the local currency of a smaller country or a failing state. A good example is Ecuador, which replaced its official currency (the sucre) with the U.S. dollar in 2000 after high inflation forced citizens to convert their money to U.S. dollars.19
With China's Digital Yuan and the European Digital Euro and more particularly the joining of South Africa and Ghana in the digital currency race, Nigeria's eNaira is very commendable in the Afri-digital space. Nonetheless, it is hoped that the CBN will not just join the digital-currency race but will also seek to promote citizen's confidence in the use of digital currencies.
1 Oreoluwa Adebayo, Associate Corporate Finance & Capital Markets Department, SPA Ajibade & Co., Lagos, Nigeria.
2 Investopedia, "What Is a Central Bank Digital Currency (CBDC)?", available at https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp, visited on 15/12/21.
3 IDEX, 'What is Central Bank Digital Currency and How does it Work?', available at https://www.idexbiometrics.com/what-is-central-bank-digital-currency-and-how-does-it-work/, accessed on 16/12/21.
4 Shrimpy Academy, 'CBDC vs Cryptocurrency: What Are the Core Differences?', available at https://academy.shrimpy.io/post/cbdc-vs-cryptocurrency-what-are-the-core-differences, accessed on 20/12/21.
5 See Coindesk "10% of Central Banks Surveyed Close to Issuing Digital Currencies: BIS" available at https://www.coindesk.com/policy/2020/01/24/10-of-central-banks-surveyed-close-to-issuing-digital-currencies-bis/, visited on 2nd September 2021.
6 See Corporate Finance Institute, 'Libra Cyrptocurrency', available at https://corporatefinanceinstitute.com/resources/knowledge/finance/libra-cryptocurrency/, accessed on 16/12/21.
7 See People's Gazette "CBN's digital currency CBDC set for October 1" available at https://gazettengr.com/cbns-digital-currency-cbdc-set-for-october-1/, visited on 2nd September 2021.
9 See Press Release: "CBN Selects Technical Partner For Digital Currency Project" available at https://www.cbn.gov.ng/Out/2021/CCD/CBN%20Press%20Release%20(CBDC)%2030082021.pdf, visited on 2nd September 2021.
10 Ibid at n. 5.
11 Section 19, Central Bank of Nigeria Act, 2007.
13 eNaira platform, available at https://enaira.gov.ng/, accessed on 16/12/21.
15 Premium Times, 'EXPLAINER: Still not clear about eNaira? Here are 10 key things to know', available at https://www.premiumtimesng.com/news/headlines/492151-explainer-still-not-clear-about-enaira-here-are-10- key-things-to-know.html, accessed on 16/12/21.
17 Ibid at n. 1.
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